President Barack Obama on Tuesday will propose the most aggressive increase in U.S. auto fuel efficiency ever in a policy initiative that would also directly regulate emissions for the first time and resolve a dispute with California over cleaner cars.

A senior administration official, speaking to reporters late on Monday on the condition of anonymity, said average fuel standards for all new passenger vehicles -- cars and light trucks -- would rise by 10 miles a gallon over today's performance to 35.5 miles per gallon between 2012-16.

Climate-warming carbon emissions would fall by 900 million metric tons, or more than 30 percent over the life of the program, the official said.

All companies will be required to make more efficient and cleaner cars, the official said, saying the government estimates the program will save 1.8 billion barrels of oil.

U.S. and key overseas automakers, including General Motors Corp, which is on the verge of probable bankruptcy, and efficiency leader Toyota Motor Corp of Japan, support the plan, an industry trade group said.

GM and the auto industry benefit by having more consistency and certainty to guide our product plans, GM Chief Executive Fritz Henderson said in a statement.

Toyota Motor Sales USA President James Lentz said the single national standard will enhance vehicle choice for consumers. The new program, according to the administration, will add about $600 to the price of producing a vehicle compared to current law, which requires automakers to achieve a fleet average of 35 mpg by 2020, a 40 percent increase over today's performance.

US auto companies fought significant increases in fuel standards for decades before Congress and the Bush administration agreed to stricter targets in 2007. Some vehicles, most made by overseas manufacturers, already meet or exceed the standards set to be proposed.

CALIFORNIA TO DEFER TO NATIONAL STANDARD

California also supports the Obama proposal, the official said. California had sought a waiver from federal environmental law to impose its own regulations to cut auto emissions but Bush administration would not permit it. Also, auto companies sued to stop California on grounds the initiative would create a patchwork of rules if other states followed suit instead of a single national fuel efficiency standard.

California has agreed that they will defer to the proposed national standard, the official said, if it is finalized.

Senator Barbara Boxer, chairman of the Environment and Public Works Committee, called the development good news for all of us who have fought long and hard to reduce global warming and reduce U.S. dependence on imported oil.

The 30 percent reduction in emissions is more aggressive than what California and other states that have supported its bid for a waiver have sought.

The administration in April opened the way to regulating emissions by declaring climate-warming pollution a danger to human health and welfare, in a sharp policy shift from the Bush administration.

The new policy would give automakers flexibility to meet the standards and would weigh the impact on the environment of carbon-based fuels and other vehicle systems that emit emissions, like air conditioners.

This could be the breakthrough we've been looking for on clean cars, said David Friedman, research director of the clean vehicle program at the Union of Concerned Scientists.

The plan assumes average gas prices of $3.50 per gallon by 2016, which administration officials hope will help push consumers into more fuel-efficient cars and trucks.

Automakers are aggressively pursuing better hybrids and electric cars. But more recent declines in gas prices in the later half of 2008 and so far this year due to a recession-induced demand falloff have revived sales, in some cases, of less efficient pickups and SUVs.

To help lift the industry out of its sharp sales slump, Congress is considering legislation that would offer consumers up to $4,500 to trade in older, less fuel-efficient models for vehicles that get sharply higher gas mileage.

Separately, a key committee in the U.S. Congress on Monday kicked off what promises to be a week-long climate change debate as Democrats aimed to advance a bill to slow global warming and Republicans maneuvered to kill a central part the plan they say will hurt the U.S. economy.

(Additional reporting by Tom Doggett and Deborah Zabarenko; editing by Todd Eastham.)

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